Since the beginning of time, people have desired to obtain items that they did not possess. Often, to accomplish this, they gave something in return in order to obtain what they wanted. Thus, in effect, they were creating a “market” where goods and/or services could be traded. The trading for a particular good usually lasted until everyone who wanted that good obtained one. But, as is often the case, if the one who was supplying the good demanded more in return than what another wanted to give up, that other person left the market without that good. In spite of not getting that particular good, the person, however, was still satisfied because they felt that what they did have was better than the good they did not obtain. This is generally known as “buyer satisfaction.” In other words, buyers enter a marketplace and buy the items they need until the price of a particular item is more than they deem worthy for their own satisfaction. Satisfying a person tends to be a very individual trait; however, over a large number of people involved in a large market, the extreme differences settle out, leaving a general value or “price” of a good for that particular market. If the market price is too low, everyone will demand to have one, quickly depleting the supply of the good. However, if the price of the good is too high, the supply will remain high, with no trades taking place. Ideally, it is most desirable to have the supply equal the demand. Thus, as soon as a good is ready for market, it is quickly sold to someone who needs it. In this manner, a market is considered to be operating “efficiently” due to the supply equaling the demand. All buyers who desire a good at the market price are satisfied, while all sellers have sold their supplies, maximizing sales of their goods. This optimum market price, where supply equals demand, is known as a “market equilibrium price.”
Because the market equilibrium price affords great benefits to both sellers and buyers in a market, it is very desirable to ascertain this price, especially for new goods entering a marketplace. A new supplier does not want to manufacture a high volume of goods if its manufacturing costs generate a product price that is too high to move the amount of goods. Likewise, if the new supplier attempts to sell below the market equilibrium price, the supplier will quickly run out of goods because the demand will far exceed the supply. Again, ideally, the supplier wants to produce the right number of goods at the market equilibrium price. Thus, the market equilibrium price becomes a very powerful business tool, foretelling product success or failure in the marketplace. For this reason, great efforts have been made to determine a market equilibrium price for a given good in a given market. Despite these efforts, it is still very difficult to produce a viable market equilibrium price. The amount of variables/factors involved with determining/defining a market are not inconsequential. Market data, such as number of buyers, number of sellers, value to a buyer, production costs, and even weather, play an important role in pricing of goods. Thus, market parameters must be modeled adequately to foretell a market equilibrium price.
Accordingly, the behavior of a complex marketplace with multiple goods, buyers, and sellers, can only be understood by analyzing the system in its entirety. In practice, such markets tend toward a delicate balance of supply and demand as determined by the agents' fortunes and utilities. The study of this equilibrium situation is known as general equilibrium theory and was first formulated by Léon Walras in 1874 (see, Éléments d'économie politique pure; ou, Théorie de la richesse sociale (Elements of Pure Economics, or the theory of social wealth); Lausanne, Paris, 1874 (1899, 4th ed.; 1926, rev. ed., 1954, Engl. transl.)). In the Walrasian model, the market consists of a set of agents, each with an initial endowment of goods, and a function describing the utility each one will derive from any allocation. The initial allocation could be sub-optimal, and the task of exchanging goods to mutually increase the utilities might be fairly complicated. A functioning market accomplishes this exchange by determining appropriate prices for the goods. Given these prices, all agents independently maximize their own utility by selling their endowments and buying the best bundle of goods they can afford. This new allocation will be an equilibrium allocation if the total demand for every good equals its supply. The prices that induce this equilibrium are called the market-clearing prices (or market equilibrium price), and the equilibrium itself is called a market equilibrium.
Despite the better understanding of how a marketplace functions, modeling such a marketplace has proven extremely difficult. An agent is often both a buyer and a seller of goods. Satisfaction of a buyer can change dependent on many factors including how the buyer is doing as a seller (e.g., were enough goods sold so that the agent could function as a buyer of a good, etc.). Many variables that may seem trivial at first can have profound impact on a marketplace. Theoretical constructs that attempt to provide a basis for modeling the marketplace tend to be extremely complex for these reasons. The complexity often reaches a point where the basis for the model cannot even be resolved with today's fastest computers. Thus, even with the great technological advances in this century, the Walrasian model described in 1874 still cannot be effectively modeled. This leaves society without a means to maximize their markets, resulting in waste of not only manufactured goods, but also a waste of natural resources utilized in products brought to market. Thus, inefficient markets actually cause an increase in overall prices for goods and services.